You know, the reporting by news outlets on the financial world is a little like their reporting on the military. Some of it is good, and some of it you read with the sense that the person just switched over from the sports beat or covering what new diet Jessica Simpson decided to try. Case in point: the AP's Michael J. Martinez recently wrote a story entitled:

Stars May Be Aligned for Jan. Stock Rally

NEW YORK - After a volatile 2005 and meager returns to show for it, investors are hoping 2006 will bring better fortunes. And if there's good news next week, the new year could get off to a good start.

Last January, stocks tumbled after an impressive December rally. Word that the Federal Reserve would continue hiking interest rates, combined with mediocre jobs figures, worried investors considerably. The Standard & Poor's 500 dropped 2 percent in the first two trading days of 2005.

Yet this year could be far different. First of all, there was no real December rally, so it's safe to say stocks aren't overbought. Second, the Fed has signaled that it's closer to ending its regime of rate hikes. That could be reinforced Tuesday as the Fed releases the minutes of its Dec. 13 meeting.

Now put aside the concept of whether there actually will be a rally in January, which may or may not occur for a variety of reasons, and focus on the factors identified by Martinez here. I've predicted a significant drop in the S&P, and maybe I appear to be negative on the article because it conflicts with my own prediction. But as I've always made clear, my predictions aren't any better than anyone else's. Monkeys in the Central Park Zoo can make predictions as good as mine because predicting the future is mostly just guesswork. What interested me about this story is the way Martinez reaches his conclusion, and what I'm focusing on here is why I think his reasoning is deeply flawed.

So let's look at the two factors Martinez relies on in his analysis. First, Martinez says that stocks aren't "overbought." Now whenever you see a word like "overbought", the very first reaction you should have is "where the hell did this weird word come from- that's not a real word, is it?" Because the term "overbought" implies that there's some benchmark line in which stocks are "rightly-bought," and anyone who's spent more than fifteen minutes with a copy of the Wall Street Journal should know that there's no real benchmark for measuring the intrinsic value of the stock market.

Yes, there are a variety of indicators used by Wall Street folk to estimate the future course of the market, but since the price of stocks depend on the outcome of future and unknowable events, the market price is no more than a collective, educated guess of what the future holds. The guess may turn out to be right or wrong, but to call it "oversold" or "overbought" indicates a knowledge of the future that is superior to the markets. As far as I've seen, the typical definition of "overbought" or "oversold" on Wall Street is flexible, basically meaning when it's used in any context: "you should buy more stocks." The words don't have any place in a journalist's phrase book.

Which brings us to Martinez's second point: "the Fed has signaled that it's closer to ending its regime of rate hikes. That could be reinforced Tuesday as the Fed releases the minutes of its Dec. 13 meeting." As I said earlier, the market price of stocks anticipates events. If the market expects the Federal Reserve to stop tightening interest rates, then they've already factored that future event into the current price of stocks. If the Fed does what it's expected to do, then the current level of the indexes shouldn't change significantly because everyone has already bought or sold stock expecting that the Fed will stop tightening. Only if the Fed does something that the market doesn't expect will the current price change much, and since the expectation is the the fed will stop tightening soon, only a Fed decision to keep tightening through the spring is likely to move the price of stocks substantially higher. And because Mr. Market views a rate increase with the same loathing that a heroin addict views an intervention, if the Fed keeps tightening it's far more likely that stocks will fall rather than rise. So how could Martinez look towards the Fed's action for support of higher stock prices in January?

Now I don't know why Mr. Martinez decided to write this article. I admit to an ignorance of the way the Associated Press works. Is a story about a potentially stock market rally favored over a story about a stagnant stock market? I don't know. But I'd ignore the AP's take on the stock market in the future. They seem sharper when it comes to writing about politics in D.C. or about Brad Pitt and Angelina Jolie's baby. Maybe business just isn't their bag, baby.